Spunky Productions is about as much on the leading edge as a
business can get. As a digital media company, the San Francisco
firm is producing and syndicating what co-founder Karl
Kronenberger, 32, calls one of the largest collections of original
Web-based interactive cartoons and live-action programs for
children in the world.

Plus, Spunky Productions is at the crossroads of one of the
hottest trends in Hollywood: the distribution of entertainment
content over the Internet. According to Kronenberger, "Many
international media companies who can't own cable or television
assets in the United States see the Internet as a viable
distribution channel for entering the U.S. market." Moreover,
he says, the entertainment industry will be in for another radical
redefinition when the next generation of wireless Internet products
come to market during the latter half of 2001.

The incredible opportunities that companies like Spunky
Productions are pursuing require more than just creative genius and
an audience, however. They require capital, and lots of it. And
growth capital is getting harder to find, because investors are
getting much more cautious. A sell-off of Internet stocks
notwithstanding, the reasons for this change are more systemic and,
in fact, threaten the longest-running economic expansion in U.S.
history.

David R. Evanson's newest book about raising capital is
called Where to Go When the Bank Says No: Alternatives for
Financing Your Business (Bloomberg Press). Call (800) 233-4830
for ordering information. Art Beroff, a principal of Beroff
Associates in Howard Beach, New York, helps companies raise capital
and go public, and is a member of the National Advisory Committee
for the SBA.

Market Fissures

Investment banker Kenneth Kamen, co-founder of Princeton, New
Jersey-based Princeton Securities Corp. and chair of the trade
group Regional Investment Bankers Association (RIBA), suggests the
culprit for this ominous prediction is, surprisingly, the stock
market itself. Specifically, he says, the markets are evolving and
changing in ways that are tremendous for large companies and
institutional investors but disastrous for small companies looking
for capital, like Spunky Productions.

Based on this evolution, Kamen posits the following scenario as
potentially very dangerous to the economic prosperity of the
country. More precisely, as the markets get regulated into a
posture that emphasizes large companies over small ones, the
appetite for IPOs dries up. Venture capital investors and angel
investors, seeing their exit strategies disappearing, pull in their
horns and dramatically reduce the number and dollar amounts of
investments they make in promising entrepreneurial businesses.
Suddenly, the volume of venture capital tumbles from 1999's
volume of some $50 billion to the $5 billion that the National
Venture Capital Association says was more typical in the early
'90s.

In many ways, the fissure has already begun. Consider these
statistics: RIBA, which consists of investment banking firms that
focus on IPOs of $20 million or less, has seen the number of deals
completed by its members fall off dramatically as the markets have
focused on larger companies. For instance, during 1994, association
members completed 190 offerings and raised $2.3 billion. In 1999,
the number was 38 offerings for $228 million. But the numbers
provided by RIBA aren't the final word. After all, not every
investment banker who provides services to small businesses is a
member of the association. Yet, as a proxy for overall market
activity, the trend they indicate is clear: The stock markets are
less receptive to small businesses. Says Kamen, "It's not
the investment bankers who are suffering from this decline,
it's the companies looking for capital." history.

Shifts Affecting Small Businesses

According to Kamen, some of the more fundamental shifts that
have worked against small businesses include:

The emergence of ECNs.
Electronic Communications Networks (ECNs) represent a new, more
efficient way for institutional investors to access and trade in
the market. And groups like Institnet, Island and Archipelago have
captured a substantial portion of the trading that used to be
conducted through brokerage firms. The problem with this trend,
suggests Kamen, is that ECNs haven't fully reached into the
lower tiers of the market, namely the OTC Bulletin Board. "The
great technological advancements haven't been implemented in
the lower-tier markets," says Kamen. "Therefore, when the
only way traders and investors can access these companies is
through technology that's totally archaic, they'll cease to
support and invest in these small companies."

Tightening of listing
standards. Kamen says the tightening of initial and
continued listing standards, which was implemented in 1998 for the
Nasdaq SmallCap market, has undermined the cause of small issuers.
"Increased listing standards for the Small-Cap market had two
unfortunate side effects," he says. "First, it meant that
many companies could no longer go public, because they wouldn't
be large enough to meet the new listing requirements. Second, many
companies that were once trading on the SmallCap market got
delisted for failing to meet the new standards." There are
informed investors who are willing to accept the risks involved
with these stocks, but the latter occurence, says Kamen, "was
a tragic event for many companies because they were thrown onto the
OTC Bulletin Board, a marketplace that reduced their access to a
broad base of brokers and institutional investors."

The emergence of for-profit stock
markets. This past April, members of the National
Association of Securities Dealers (NASD), which owns Nasdaq, voted
to spin off the stock market as a for-profit entity. "The idea
of a for-profit stock market is a good one," says Kamen, but
"how will [it be regulated]? Will the cost of regulation be so
high that it drives the brokerage firms which support and fund
small companies out of business?" In addition, Kamen says the
prospectus detailing the spinoff of the stock market makes the
future of the Bulletin Board unclear. "There was only one
paragraph that even referred to the Bulletin Board," he says,
"which does not bode well for the businesses that are trading
there."

The trend toward late
trading. Brokerage firms that trade and make markets in
Microsoft or Intel can profitably do so 24 hours per day, because
the average daily volume is in excess of 30 million shares. But for
firms that concentrate on smaller issues, trading perhaps just
50,000 to 100,000 shares per day, or less, a longer trading day
means just one thing: longer business hours waiting for business
that is unlikely to come. Says Kamen, "The effect of
across-the-board longer trading hours will cause the firms which
have traditionally supported small business to focus on larger
companies, further exacerbating the large company focus in the
marketplace."

Efforts to narrow trading
spreads. A trading spread is the difference between the
bid price of a stock-what buyers are willing to pay-and the ask
price-what sellers want for their stock. Large spreads are
detrimental to investors because they result in higher prices.
Kamen says the securities regulators, such as NASD and the
Securities and Exchange Commission, have worked to narrow these
spreads through the adoption of new order-handling rules in 1996,
and, more recently, with the approval of trading in decimals rather
than fractions to allow smaller increments of the spread.

What's behind all this day-trading business? Read
"A
Trade A Day" to find out what the hype's all
about.

"Narrowing spreads is a completely noble motive by
securities regulators to protect investors and to make the markets
more attractive to capital," says Kamen. "But the trend
toward a one-size-fits-all market is a critical error. A company
like Oracle with a market capitalization of $240 billion has
significantly different trading characteristics than a stock with a
market cap of just $35 million." Specifically, Kamen says, if
spreads are tightened too much, there's little profit motive
for brokerage firms to support and invest in smaller companies.
"If you can't make money trading or underwriting small
companies, 'Why work with them at all?' has been the
attitude adopted by many securities firms," says Kamen.

For companies like Spunky Productions, there's a real risk
of getting caught up in the vortex of the changing marketplace. The
diminished likelihood of an IPO results in diminished opportunities
for private capital. "Unfortunately," says Kronenberger,
"we can't control the market or the appetite for
investment in companies like ours. It's scary to have a large
part of your destiny outside of your control." And although
the search for capital continues, there's no sense of urgency
just yet.

Still, the forces shaping the market are much larger than any of
its constituents. The real force is that if current trends
continue, small businesses, the engines of job growth and
innovation, will have nowhere to go.

Tiers For Fears
The Over-the-Counter Stock Market is divided into several
tiers:

The Nasdaq National Market.
This is the trading venue for the largest, most liquid stocks.
Among them are Dell Computer, Intel, Microsoft and
Yahoo!.

Nasdaq Smallcap market. This
market hosts up-and-coming companies, but there are few, if any,
household names. Both this and the National Market offer wide
distribution of quotes, news and company information. In addition,
they offer traders and institutional investors efficient electronic
access to companies.

The OTC Bulletin Board. While
the Bulletin Board offers electronic distribution of quotes, many
investors consider it a lower-tier venue. Many securities
professionals, venture capitalists and entrepreneurs feel that the
Bulletin Board should be beefed up with the latest technology to
provide a state-of-the-art incubator stock market.

The Pink Sheets. At the lowest
level of the OTC market are so-called Pink Sheet stocks, so named
for the color of the one daily publication that tracks the prices
of companies that trade here. There's a limited distribution of
electronic quotes, and companies that trade here don't
necessarily file financial information with the FCC.